There are so many perks to homeownership, including certain tax breaks. For instance, if you own a home, you may be eligible to deduct interest expenses on up to $750,000 of mortgage debt, which can save you some cash come tax time.

But there may be certain taxes that you may actually have to dish out when you sell real estate, depending on your particular situation.

They’re called capital gains taxes, and they may be payable when a piece of property changes ownership.

If you turn a profit when you sell your property, you’re said to have realized “capital gains,” which basically refers to the profit made on the sale of your home. For instance, if you bought your home for $500,000 seven years ago and sell it for $750,000 today, you’ll have profited $250,000.

If you sell for more than what you paid for it, you’re obligated to report these gain to the IRS, who will then tax you on those capital gains. Depending on your situation and the status of your home, there may be taxes to be paid on that profit, or “capital gains taxes.”

But as pesky as capital gains may sound, they might not necessarily be applicable to you, as long as you and your property meet specific criteria. But how do you know if you’re subject to these taxes when you sell your home for more than what you paid for it?

Capital Gains Tax Exemptions

Luckily, there are certain situations in which you may be able to get away without having to pay capital gains taxes on any profit you make on the sale of your home.

The first $250,000 is exempt, with exceptions. You don’t have to pay any capital gains taxes on the first $250,000 that you profit from the sale of your home if you’re single, or $500,000 if you’re married. However, you and your home will have to meet the following requirements.

You owned your home for at least two years. If you’re an investor who fixes and flips properties for a profit, you’ll find that you’ll be subject to capital gains taxes on any gains you make.

That’s because the home must have been in your possession for at least two years. So, if you fix and flip the property only a few months after buying it, short-term capital gains taxes will be applicable.

You lived in the home for at least two years. Not only does your name have to have been on title for at least two years, you must have called the home your primary residence for at least two years as well.

You don’t necessarily have to have lived there for two consecutive years, but the place must have been considered your primary home in order to be exempt from paying capital gains taxes. More specifically, you must have lived there for at least two of the past five years.

You haven’t claimed exemption within the past two years. You’re only allowed to take advantage of capital gains tax exemption once every two years. However, you can take advantage of this exemption over and over again without limit, as long as it’s not repeated any more often than every couple of years.

A Word About 1031 Exchanges

If you’re a real estate investor and are concerned about the prospect of having to dish out a lot of money on capital gains taxes on your profits, you might have a way to avoid having to pay capital gains taxes thanks to something called a “1031 exchange.”

As per IRC Section 1031, a 1031 exchange allows investors to sell a property and reinvest the proceeds of the sale to purchase another property. While this is a simplified explanation of what a 1031 exchange is, it’s a great way for investors to hold onto their gains and use them to continue investing in real estate and grow their wealth without having to constantly pay up every time a property is sold at a profit.

Short- Vs Long-Term Capital Gains

If you are required to pay capital gains, you will want to know if you’ll be subject to short- or long-term gains, as this will affect how you’re actually taxed.

Short-term gains apply to homes that are owned for less than one year. In this case, the rate is equivalent to your tax bracket. Long-term gains apply to homes that are owned for at least one year. And while long-term gains are typically taxed lower than short-term gains, the exact amount of taxes you have to pay will depend on your income.

People with higher incomes could pay as much as 15% to 20%, while those with a more limited income might not owe anything at all.

The Bottom Line

No one likes to pay taxes, but if you get familiar with how the IRS taxes home sellers and play your cards right, you may be able to avoid paying capital gains taxes when you sell. Be sure to discuss your particular situation with a tax specialist to find out where you stand as far as capital gains taxes are concerned.

If you’ve been thinking about investing in real estate and buying a property to rent out over the long haul, you might want to consider a somewhat unique investment opportunity: vacation rentals.

In fact, renting out vacation properties has become all the rage lately thanks to sites like Airbnb, VRBO, and HomeAway. Travelers have become savvy in their choice of accommodations abroad, choosing places that mimic home rather than defaulting to tiny hotel rooms with very few amenities.

If you invest in the right vacation property, you can realize a full calendar of bookings throughout the year. But it’s important that you play your cards right in order to make sure that the property you invest in will make it easy for you to turn a profit.

Here are some things you should consider before investing in a vacation home.

Identify a Market For Vacation Rentals

As with any other type of real estate investment, choosing the right location of your vacation home is crucial. Find out what the market is like in the area you’re looking at to see how in-demand it is for travelers and those looking for accommodations.

Make sure the property is located in a place that vacationers would want to spend their holidays. The right location can make marketing and renting your vacation property so much easier. The more desirable it is, the more frequent bookings you can enjoy.

There are so many potential scenarios you may want to think about when choosing a location. A quiet waterfront cottage, a condo close to entertainment and shopping, a beach property, or a townhouse in a ski resort are all great examples of the types of vacation homes you may want to consider that vacationers would flock to, as long as there’s demand.

Determine How Much You Can Rent For

There are obvious costs associated with buying and operating a piece of property. And when it comes to vacation rentals, you want to make sure that the rent you charge can at least cover all associated expenses. Ideally, you’ll want to turn a profit, which is the whole idea behind buying and renting out a vacation home.

But in order to make sure you’re profitable, you’ll want to know how much you can realistically rent the place out for. You can always scope out vacation rental websites to find out what similar properties in the area are going for.

Or, you might get a more accurate idea by having a real estate agent conduct a thorough analysis of the area and what vacation rentals fetch in short-term rent.

Get Yourself Enough Insurance Coverage

Homeowners insurance is a must for anyone who owns real estate. But with vacation properties that you’ll be renting out to complete strangers on a regular basis, you might want to get yourself more comprehensive coverage that will protect you.

In addition to buying a policy that covers the cost of completely replacing the property should disaster strike, it’s also important to consider taking out a personal liability policy that will deal directly with the ownership and rental of the property, including all assets inside the unit.

Look into policies that will also protect you while your property is vacant between tenants. And if there are any heightened risks in the area that you’re looking at buying into – such as earthquakes, forest fires, or floods – take out a policy that covers that, too.

Factor in All Costs

It goes without saying that you’ll need to assess the prices of the properties you’re looking at and make sure you can afford them. But the mortgage is only one part of the mathematical equation when it comes to vacation rental investments.

After you’ve determined that you can afford the place and are able to secure a mortgage, you’ll need to take a detailed look at all the costs that will be associated with operating the property. This includes, but is not limited to, the following:

• Property taxes
• Maintenance
• Repairs
• Utility bills
• Insurance
• Cleaning fees (if you hire an outside cleaning company)
• Property management fees (if applicable)
• Marketing

Don’t make a purchasing decision without first having figured out what it’s going to cost you to keep the property running. And don’t forget to consider times when your unit is vacant, as you won’t have any rental income coming in to cover your carrying costs.

Make Sure You Have Adequate Cash Reserves

The last thing you want is to be strapped for cash one month because you don’t have a financial cushion to carry you through slower times when your property is not rented out.

As such, it’s wise to have adequate cash reserves before you invest in a vacation property. Besides, your lender will likely require you to have a certain amount of money before approving your mortgage.

The Bottom Line

There are plenty of opportunities to make a great income and build wealth in the realm of vacation properties. And with vacation rental sites like Airbnb and VRBO exploding, now might be a great time to take advantage of such a lucrative opportunity. Just make sure you’ve dotted your i’s and crossed your t’s before you dip your toes into this type of investment.

I rarely find myself eating in The Loop, but this week was an exception! I went to Dylan’s Tavern and Grill, located at 118 South Clinton, near Union Station. The atmosphere is relaxed and casual and the interior is beautifully decorated, with a large wooden bar and mahogany tables. The menu is sizable, but not overwhelming. Even though the appetizers sounded delicious (Nachos and stuffed jalapeño poppers? Yes please!) we decided to save our appetites for the main course. I chose the Blackened Salmon, served with mashed potatoes and mixed vegetables. I decided to sub the mashed potatoes for coleslaw. I was very pleasantly surprised by this dish! It can be risky to order fish in a tavern, but this really paid off. The salmon was well cooked, it had a nice crispy outside and a wonderfully juicy inside. The mixed veggies were a heaping pile of squash, broccoli, and bell pepper- all roasted and seasoned very nicely. The coleslaw wasn’t incredible, but that’s not too surprising. My boyfriend ordered the Grass-Fed Burger: a ground chuck burger chargrilled, topped with green leaf lettuce, tomato, onion, and American cheese on a buttered brioche bun. This was very tasty as well! My first qualification for a good burger is that it’s cooked how you order it. He ordered it medium rare and it was cooked that way, so we were off to a good start. The veggies were fresh and the brioche bun was delicious. The fries on the side were very tasty as well!

Dylan’s is open Mondays and Tuesdays from 11 am to 11 pm, Wednesdays and Thursdays from 11 am to 12 pm, Fridays from 12 pm to 2 am, Saturdays from 12 pm to 3 am, and Sundays from 12 pm to 12:30 am. They have Salsa Dancing on Friday and Saturday nights, beginning with a lesson from 9-10 pm. Find more information here.

RACHEL HOOVLER & DEAN’S TEAM CHICAGO

A gorgeous house in a great neighborhood is definitely something that will catch buyers’ attention. And the best house on the block will certainly stand out from the rest.

But is purchasing the best house in the neighborhood a sound investment?

It’s safe to say that many buyers want a home that’s move-in ready. A home that’s already all decked out in fine finishes and updated with modern materials is something that a good chunk of buyers are looking for.

With nothing to do to upgrade a home, buyers can simply move their belongings in and start enjoying their new home. And who doesn’t love a great house? And more specifically, who wouldn’t want to own the best house on the street?

There may be some situations where it might make sense for you to invest in what’s arguably the best house in the area. Maybe the home has certain unique features that you want that you can’t find in any other home you’ve visited. Or maybe you have no desire nor inclination to update the home yourself.

If your finances can justify the purchase and you’re planning to stick around for the long haul, perhaps it might make sense to snag the place, even if there’s no wiggle room to add value to the place yourself.

But in most other cases, buying the best home in the neighborhood isn’t a sound investment decision. Here are some drawbacks to such an investment.

The Rate of Appreciation Won’t Be as Fast as Other Homes on the Block

One of the great things about owning real estate is the increase in value that you can realize if you hang onto the property for the long haul. While property values may dip from time to time, such fluctuations are temporary. Over time, the value of real estate goes up.

But if you buy a house that’s already improved, there’s little room to make any improvements on your own that will have a decent impact on the value of the property.

Instead, a home that could use a little improvement will give you the opportunity to add value. Compared to the worst house on the block, the rate of increase in the value of the best home will be a lot slower.

Further, you’ll also miss out on the opportunity to take advantage of an increase in value that tends to come from the sale of other homes in the neighborhood. With the highest-valued home on the block, the sale of other homes in the area won’t have as much of a positive effect on boosting your property’s value.

The worst home on the block will have the distinct opportunity to increase in value when they’re surrounded by higher-value homes.

For instance, a home that’s worth $500,000 can increase in value faster if it is surrounded by homes that are worth $700,000. But if your home is the highest-valued property on the street, you won’t be able to benefit from this effect.

The Value of Your Home Could Be Pulled Down By Other Lesser-Valued Homes

While low- to mid-grade homes can take advantage of increased value thanks to nicer surrounding properties, the value of the best home on the street can actually be pulled lower if it’s surrounded by properties that are less expensive.

This is a significant factor that needs to be considered and is typically one of the more important reasons why buyers are encouraged to steer clear of buying the best home on the block.

Future Resale Might Prove Challenging

Since you’re in the buying phase of the real estate game right now, you’re probably not even thinking about selling in the future. But it’s always important for buyers to keep resale in mind when they’re looking to buy. Even if your intentions are to stick around for a long time, the potential to sell at some point in the future are very real.

And if you buy the best home in the neighborhood, you might find it tough to sell if or when the time comes. More expensive homes usually have a smaller pool of buyers compared to mid-range homes, which means it will likely take longer to find the right buyer for the home.

Plus, if your home is surrounded by less-than-attractive homes, people who may be able to afford your home might prefer to be in an area with higher-value properties. And if you’re looking to make a decent profit on the sale of your home, you might find it difficult if the rate of appreciation move’s at turtle speed, as already explained.

The Bottom Line

Finding a beautiful home that has all the bells and whistles might draw you in and entice you to put in an offer, but pay close attention to the neighborhood at large. Compare the subject properties to those around it and assess the health of the neighborhood before you buy.

While it might make sense to snag the house in some cases, in most other situations, it might not be the smartest investment decision. Be sure to discuss your options with your real estate agent.